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Cultivating success

Addressing Minnesota's cannabis market complexities and opportunities

By Cory Parnell, CPA

February 1, 2024

Success in the Minnesota cannabis market hinges on a comprehensive understanding of various facets — from detailed financial modeling, which accounts for Section 280E, establishing realistic revenue targets and realistic capitalization goals, understanding the market dynamics and constantly preparing for inevitable regulatory changes.

As Minnesota’s cannabis market continues to grow and evolve, achieving a deep understanding of the complexities and opportunities within this sector is crucial.

It is essential to monitor proposed regulatory changes, stay informed and always remain adaptable.

“It’s critically important to monitor the Minnesota Office of Cannabis Management’s rulemaking process,” said Jacob Irving, J.D., vice president of consulting services at Bridge West Consulting.
While he noted there are still a lot of unknowns regarding the licensing process, the Minnesota Office of

Cannabis Management will release regulations throughout the next year, along with ordinances from local municipalities that will govern which properties can be used for cannabis businesses.

“Now is the time for cannabis entrepreneurs and operators to develop their business plans, understand capitalization requirements, build their team and understand real estate needs,” Irving said. “Minnesota cannabis businesses should be prepared to move forward as soon as the regulations and ordinances are published.”

Mitchel C. Chargo, a business lawyer and partner at Hinshaw & Culbertson LLP, similarly highlighted the importance of staying informed and ready within a rapidly changing policy environment.

"Legalizing cannabis presents a complex landscape of legal, regulatory, commercial and ethical considerations, many of which intersect with other broad categories of the law,” Chargo said. “Compliance with Minnesota’s new regulatory regime — which has yet to be revealed — will always be paramount.”

To prepare, Chargo suggests anyone venturing into the industry should assemble a team of advisers that include experienced cannabis attorneys, accountants, construction consultants and insurance brokers. Having an experienced team means you can react quickly when the time comes to apply for a license and to help guide the cannabusiness through the inevitable evolution of cannabis law and regulations.

Federal illegality

Cannabis remains illegal under federal law as a Schedule I drug despite being legal for medicinal or recreational use in many states. This discrepancy between state and federal law creates a complex legal landscape.

Regulatory environment and licensing dynamics

The regulatory landscape in Minnesota is continually changing, with the state focusing on adult recreational use. In the next year, regulations from the Minnesota Office of Cannabis Management and local municipalities will significantly impact how businesses operate. Understanding these nuances and preparing for the licensing process, which may require identifying a real estate site at the time of application, is crucial.

Entrepreneurs must be ready to act swiftly once the regulations are clarified, as a limited number of licenses might be available.

Local control and zoning challenges

Local governments in Minnesota have significant control over the cannabis market through zoning and land use regulations. These regulations can influence where businesses can operate. Strategic planning and community engagement are vital in navigating these local controls and finding suitable locations that comply with all regulations.

Commercial real estate challenges

The prohibition of vertical integration in Minnesota — except for specific licenses — creates unique opportunities and challenges in the commercial real estate market. Entrepreneurs must navigate the stigma associated with cannabis, understand the operational needs specific to these businesses, and comply with security, utility and regulatory requirements. Finding suitable properties that meet all these needs can be a significant hurdle.

Leasing hurdles

The federal illegality of cannabis creates a risk-averse atmosphere among property owners. Many landlords are hesitant to lease their properties to cannabis businesses, fearing legal repercussions or property devaluation. For landlords willing to engage with cannabis businesses, the perceived risk often translates into higher rents and additional fees. These increased costs can significantly impact the profitability and viability of cannabis cultivation operations.

Infrastructure and operational needs

Cannabis cultivation and manufacturing facilities require specific modifications, including advanced security systems, appropriate lighting and efficient ventilation. Finding properties that can either be suitably modified or already meet these stringent requirements is a considerable challenge. The intensive energy and water demand of cultivation operations might exceed what's available at some properties. This gap can necessitate significant additional investment in infrastructure, further complicating the establishment and scaling of operations.

Financial and banking complexities

The federal status of cannabis also introduces complex financial and banking challenges. Entrepreneurs must navigate limited banking services, complicated cash management and investment issues. Understanding these intricacies and exploring alternative financing methods is crucial for maintaining a stable — and compliant — financial footing.

Impact on financing

Without access to conventional banks, cannabis businesses often turn to private lenders or credit unions willing to take on the risk. However, these sources typically charge higher interest rates to mitigate risk exposure. Many cannabis businesses seek private investors or venture capital. While this can provide the necessary funds, it often comes at the cost of giving up a portion of the business or agreeing to less favorable terms.

Agricultural and cultivation challenges

Securing large tracts of agricultural land that are correctly zoned, affordable and suitable for cannabis cultivation is a significant hurdle. This challenge is compounded by competition for land in viable locations and the specific environmental requirements of cannabis cultivation. Cannabis cultivation operations must navigate stringent environmental regulations. Concerns include responsible water usage, effective waste management and the safe use of pesticides. Adhering to these regulations minimizes the environmental impact and ensures sustainable operations.

Emerging market trends

As the market evolves, keeping an eye on potential legislation changes, consumer behavior shifts and advancements in cannabis technology and products is essential. These trends can offer opportunities for innovation and growth but also require adaptability and foresight.

Seeing beyond the challenges

Despite clear difficulties, Minnesota's cannabis market is ripe with potential. From retail and cultivation to ancillary services, numerous opportunities exist for those willing to navigate the complex regulatory and operational landscape. Success in this market requires a deep understanding of the industry, strategic planning and strict compliance with all regulatory requirements.

While the Minnesota cannabis market offers substantial opportunities, it has unique and evolving challenges, especially in regulatory compliance, real estate, financial management and market understanding.

Entrepreneurs and investors interested in this market must be well-informed, adaptable and prepared to navigate these complexities to achieve success.

Corey Parnell, CPA is principal and CEO of BGM.